By Paolo von Schirach
May 19, 2011
WASHINGTON– Aside from his current and rather extraordinary “legal problems”, it seems that Dominique Strauss-Kahn, (DSK), who just resigned as head of the International Monetary Fund, IMF, got it all wrong regarding the EU-IMF rescue package for Greece he helped put together last year. As Desmond Lachman of the American Enterprise Institute, a Washington think tank, puts it in a The Financial Times op-ed piece, (The IMF is making the same mistakes all over again, May 19, 2011), DSK believed that Greece had a “liquidity” issue rather a basic “solvency” problem.
Austerity caused a deep recession
This assessment led to give large credits to Greece, while placing the country on a strict diet. Less spending would have generated the funds to repay debts and get things back in order, it was believed last year. Well, it did not work at all as anticipated. The austerity diet imposed on a weak, non competitive economy in a country riddled with tax evasion and widespread corruption, caused a deep recession. This meant even lower revenue and and thus no money to pay back the outstanding debt. The markets have no confidence in the cure. If Greece wants to borrow more, now it has to pay astronomic interests. Forget about going back to normal borrowing by 2012.
One year later, back for more
And so, one year and $ 150 bn later, we are back to square one. And this is thanks to the EU , the European Central Bank, ECB, and the IMF who got the wrong diagnosis and the wrong cure. Sick Greece is coming back for more. Will Europe and the IMF, (now without DSK’s enlightened leadership, as he is otherwise engaged, trying to stay out of jail), try more of the same? Will they just try and dilute the harsh medicine, hoping that more credits will revive Greece ands that the country will become –who knows how– a productive, competitive economy, capable of generating the surplus necessary to pay back its staggering debts?
The alternative is really bankruptcy, or “restructuring” as it is politely called. May be an exit from the Euro. But in Europe there is little appetite for the shock waves that a Greek default would generate. Too many disappointed creditors, it seems.
Greeks still do not get it
And the Greeks do not seem to get it. The citizens protest loudly against the austerity measures. May be some of them really think that they are the innocent victims of some sort of sinister international plot. And they do not seem to be willing to do even the minimum.
In the words of Lorenzo Bini-Smaghi, who sits on the board of the ECB, Athens needs to “convince its citizens to pay taxes” and “retire at 65 as everyone else does in the Western world“. Got that? One year after an immense historic disaster that brought the country down on its knees, begging for a rescue package, we are still at the rather basic –not mention essential– point of trying to convince the Greek government that, yes, it would be good for Greek people to pay taxes and that, no, retiring at 55 is not acceptable.
So much for the “policy dialogue” between lenders and debtor before and after the rescue package. Basically, the wrong cure, combined with political failure at improving incorrigible Greek behavior, made things worse. And yet, with zero improvement, Greece is cheerfully coming back for more.
ECB and IMF share responsibility for this failure
The ECB and the IMF share responsibility for this failure. Now Mr. Strauss-Kahn is out of the picture. Hopefully the IMF will get better leadership and the EU and ECB will have the courage to admit error and propose something different.
The reality is that Greece, without continuing international life support, is bankrupt. Not a pleasant picture. But this is it. With an un-cooperative society that does not accept responsibility and too many citizens still believing that “someone else”, (and not me), will have to make sacrifices, the chances that additional credits and softer terms will solve the problem are really slim. Bankruptcy is painful. But at least it may give the country, what is left of it, a chance to start all over.